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Calculation of $35 billion loss.

The Cost of Flaherty's Eviction Notice - May 14, 2007

Until recently, the 2.5 million Canadians who owned income trusts were quite happy with the home that they purchased a few years back and happy to pay the $6.0 billion in annual property taxes. At the time, they could have bought the home across the street for the same price, but it only had 2 bedrooms and not the 4 bedrooms of the home they needed. On Halloween of last year, the local tax collector said he was going to introduce a new additional tax on their home at approximately five times the taxes paid on the home across the street (31.5% versus 6.2%). This was being done in the name of tax fairness and leveling the playing field. As a result, these peoples’ homes immediately tanked in value to where they were worth 83 cents on the dollar. Good thing that most people didn’t sell because the value of their homes has since recovered to about 94 cents on the dollar. However, that still leaves some unresolved problems. They need to acquire a new home as they are still being evicted. Problem is the home across the street is now going to cost them $1.13. Therefore they can only buy 83% of that house.. The remaining 17% will have to be funded with cash to the tune of $35 billion. Unfortunately that’s the good news. The bad news is that many people don’t have the money to make up the shortfall and even if they did, the new home only has two bedrooms and they need four.

To make matters totally egregious, these people come to the realization that they were being evicted to make room for the new tenants who are foreign private equity and the civil servants’ in-house pension plan. Furthermore these new owners will not be required to pay the very tax that you were evicted under, nor will they be faced with the growth restrictions that you were forced to obey. In addition these new owners will see to it that they won’t even pay the old taxes of $6 billion that you were happily paying. To comfort yourself you simply repeat Flaherty’s mantra of tax fairness, leveling the playing field, unfair shifting of tax burden, blah, blah, blah.

Living off half the income that they previously had in the form of four bedrooms rather than the income known as two bedrooms, is the real expropriation that Canadians and others who invested in income trusts are fearful and incensed about. Just think if this happened to Flaherty? Do you think he would take this to court on behalf of the Whitby Head Injury Association or would he settle out of court? Either way he would have a winning case. We are quite certain about that.

Calculation of $35 billion loss:

The income trust market closed on October 31, 2006 at 164.86 as measured by the S&P/TSX Income Trust Index. On the evening of that same day, Finance Minister Jim Flaherty announced that he would introduce a 31.5% tax on income trusts. Two days later the index was at 138.21, This represents a loss of 16.2% which on a $200 billion market represents a loss of $32.5 billion. Two weeks later the index was at 135.51 representing a loss of 17.8% or $35.6 billion.

It is for this reason that we calculate the loss to be about $35 billion. To the extent that the Income Trust index has subsequently risen to higher levels does not diminish this “loss”. This is for two reasons. First, some investors may have sold immediately following this devastating announcement. Second, the subsequent increase in the index may itself be as a result of the effectiveness of advocacy against the trust taxation and therefore the market will have rebounded to reflect this degree of optimism. To the extent that this tax policy is actually enacted, this positive anticipation will dissipate and the index will drop to reflect this new reality. Second, there are an infinite number of variables that affect markets that would have intervened in the meantime that make it impossible to isolate the ongoing amount of the loss associated strictly with this policy. Those who cite loss numbers less than $35 billion are making the false assumption that the market, absent Flaherty’s devastating tax, would not currently be at a higher level than it was on October 31, 2006, namely 164.86. Their loss analyses incorrectly make this assumption. The correct loss figure is $35 billion.